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McQueary v. McQueary (9/29/95), 902 P 2d 1326
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0607, fax (907) 276-5808.
THE SUPREME COURT OF THE STATE OF ALASKA
FRANK MCQUEARY, )
) Supreme Court No. S-6216
Appellant, )
) Superior Court No.
v. ) 3AN-88-9553 CI
)
LINDA LEIGH MCQUEARY, ) O P I N I O N
)
Appellee. ) [No. 4263 - September 29,
1995]
______________________________)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage,
Rene Gonzalez, Judge.
Appearances: Sharon L. Gleason, Law Office
of Sharon L. Gleason, Anchorage, for
Appellant. Susan D. Mack, James T. Stanley
Corporation, P.C., Anchorage, for Appellee.
Before: Moore, Chief Justice, Rabinowitz,
Matthews, Compton and Eastaugh, Justices.
MATTHEWS, Justice.
Frank and Linda McQueary were divorced in 1988. The
sole issue arising out of the superior court's division of their
property is the valuation of the "Diamond H" ranch, a horse
stabling and riding business which the couple co-owned. The
ranch was encumbered by a $553,249.44 interest-free debt, payable
over twenty-five years in monthly installments of $1,776.00. The
superior court found that the market value of the ranch, not
including the debt owed on it, was $470,323. This finding is not
disputed.
The superior court decided not to reduce the zero-
interest debt owed on the ranch to net present value. The court
simply subtracted the nominal value of the debt from the $470,323
market value figure and concluded that the ranch had a negative
net equity of $115,923.42.
The superior court found that Linda and Frank are both
able-bodied and capable of supporting themselves. The court
stated that Frank is capable of earning an annual salary of
approximately $46,000 per year. The court found that Linda's
sole means of support is the net income from the ranch. The
court stated that the income Linda can expect to earn from the
ranch is greater than Frank's potential income, and attempted to
compensate for this in its division of the couple's property and
debt.
The court awarded Linda the ranch and $58,478 worth of
other items of property, and ruled that Linda would assume the
$553,249.44 zero-interest loan on the ranch as well as another
loan of $24,028.76. The court awarded Frank a $2,000 book
collection and required him to pay off a loan of $8,968.22. The
court split a collection of art and ivory evenly and the parties
were allowed to keep their personal vehicles. Because the court
did not reduce the interest-free debt on the ranch to present
value, the court considered the net value of the assets and debts
awarded to Linda to be negative.
The superior court's decision not to reduce the zero-
interest debt to present value was clearly erroneous. In our
previous decisions, we have ruled that proper valuation of
marital assets requires the reduction of streams of future
payments to present value. See, e.g., Wainwright v. Wainwright,
888 P.2d 762, 765-66 (Alaska 1995) (trial court erred by failing
to properly calculate present value of future pension benefits).
When an asset or investment is valued, both the future income
from the asset and the future debt payments on the asset must be
reduced to present value.1
Under the valuation method used by the superior court
in this case, the division of property would have been the same
whether the interest rate on the $553,249.44 loan was zero
percent, five percent, or fifteen percent. Yet the higher the
interest rate, the worse off Linda would have been by assuming
the debt. By failing to take the interest rate into account, the
superior court improperly valued the ranch.2
The superior court's decision not to reduce the zero-
interest debt to present value and its finding that the net value
of the ranch was negative are REVERSED, and this case is REMANDED
for further proceedings. On remand, the superior court should
ascertain the net present value of the zero-interest loan and
subtract that number from the $470,323 market value figure to
arrive at the net value of the ranch. The superior court should
use its sound discretion to pick between the various discount
rates proposed by the experts of the parties. Cf. Matson v.
Lewis, 755 P.2d 1126, 1129 (Alaska 1988).3
_______________________________
1 Examining a hypothetical will make it easier to
understand why the superior court's choice not to reduce the debt
to present value was incorrect. Consider two physically
identical houses, X and Y, which would each be worth $100,000 if
no debt was owed on them. House X is encumbered by a $50,000
mortgage with an interest rate of one percent; house Y is
encumbered by a $50,000 mortgage with an interest rate of fifteen
percent. Clearly, a buyer would pay much more to purchase house
X and assume the mortgage on it than to purchase house Y and
assume its mortgage. It would be unjust to treat house X and
house Y and the mortgages on them exactly the same way in a
division of marital property.
2 In addition, the superior court's finding that the
ranch had negative net value contradicts its finding that the
ranch produces positive net income. A common way to value
investments and assets is by analyzing the income they are
expected to produce. If an investment is expected to generate
positive net future lifetime income, it must have positive net
present value.
3 Linda argues in her brief that if this case is
remanded to the superior court, we should instruct the court to
have Frank "reimburse the Ranch for his share of partnership
contributions." Since Linda is the appellee, and she did not
file a cross-appeal, we will not consider her reimbursement
argument. See, e.g., Jackson v. Nangle, 677 P.2d 242, 247 n.3
(Alaska 1984).
Linda also argues that the superior court's division of
property should be upheld for several equitable reasons.
However, the sole issue before us in this case is the valuation
of the ranch. We may not attempt to compensate for the superior
court's valuation error by reweighing the equities of the
property division. Linda may make her equitable arguments to the
superior court on remand.